Cherry Hill Vineyards, LLC v. Hudgins

• Decision Date: 26 December 2006
• Docket Number: Civil Action No. 3:05CV-289-S.
• Citation: 488 F.Supp.2d 601
• Parties: CHERRY HILL VINEYARDS, LLC, et al., Plaintiffs v. V. Lavoyed HUDGINS, in his Official Capacity as Executive Director of the Kentucky Office of Alcoholic Beverage Control, Defendant and Wine and Spirits Wholesalers of Kentucky, Inc., Intervening Defendant.
• Court: U.S. District Court — Western District of Kentucky

488 F.Supp.2d 601

CHERRY HILL VINEYARDS, LLC, et al., Plaintiffs v. V. Lavoyed HUDGINS, in his Official Capacity as Executive Director of the Kentucky Office of Alcoholic Beverage Control, Defendant and Wine and Spirits Wholesalers of Kentucky, Inc., Intervening Defendant.

Civil Action No. 3:05CV-289-S.

United States District Court, W.D. Kentucky, at Louisville.

December 26, 2006.

COPYRIGHT MATERIAL OMITTED

Alan N. Linker, Joseph H. Cohen, Seiller Waterman, LLC, J. Gregory Troutman, Louisville, KY, James A. Tanford, Indiana University School of Law, Bloomington, IN, Michael J. Donahoe, Robert D. Epstein, Epstein Cohen Donahoe & Mendes, Indianapolis, IN, for Plaintiffs.

Andrew D. Desimone, Bryan H. Beauman, Douglas L. McSwain, Sturgill, Turner, Barker & Moloney, PLLC, Lexington, KY, for Defendant.

Kenneth S. Handmaker, Kevin L. Chlarson, Middleton Reutlinger, Daniel R. Meyer, Louisville, KY, for Intervening Defendant.

MEMORANDUM OPINION

SIMPSON, District Judge.

This matter is before the court on cross-motions of the parties for summary judgment. The plaintiffs, Cherry Hill Vineyards, LLC, William G. Schneider, Jr. and John D. Reilly, Jr.,¹ successfully challenged the constitutionality of certain provisions of Kentucky's laws regulating small and farm wineries.² This court ruled, in accordance with the United States Supreme Court decision in Granholm v. Heald, 544 U.S. 460, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005), that various provisions of KRS Chapters 241 through 244 discriminated against interstate commerce by prohibiting small out-of-state wineries from selling and shipping wine to Kentucky consumers and retailers on the same basis as permitted for in-state wineries. In August, 2006, the court struck the unconstitutional provisions and enjoined enforcement of KRS 244.165 against all properly licensed out-of-state small or farm wineries.

The court entered judgment despite the passage of new legislation amending the statutory scheme. The court did so in light of the fact that this new scheme would not become effective to alter the unconstitutional provisions until January 1, 2007.³

The plaintiffs were permitted to amend their complaint to add challenges to the constitutionality of the amended statutory scheme.⁴ The parties engaged in limited discovery and filed motions for summary judgment on an expedited schedule in order to give the court sufficient time to consider the matter prior to the effective date of the legislation. The plaintiffs seek judgment declaring SB 82 unconstitutional. The defendants, V. Lavoyed Hudgins, in his official capacity as the Executive Director of the Kentucky Office of Alcoholic Beverage Control ("the State") and the Wine and Spirits Wholesalers of Kentucky, Inc. (collectively, "defendants"), urge the court to conclude that the enactment remedies the ills of the former statutory scheme and permissibly regulates the sale and shipment of wine in the Commonwealth. Additionally, the defendants challenge on a number of bases the plaintiffs' standing to pursue their claims with respect to SB 82.⁵

In Granholm, supra., the Supreme Court struck down Michigan and New York laws regulating the sale and shipment of wine. Granholm taught that the statutory schemes which "mandate `differential treatment of in-state and out-of-state economic interests that benefit[] the former and burden[ ] the latter'" violate the Commerce Clause. Granholm, 544 U.S. at 472, 125 S.Ct. 1885. When a statute has "only indirect effects on interstate commerce and regulates evenhandedly" the Supreme Court has "examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits." Brown-Forman Distillers Corp. N.Y. State Liquor Authority, 476 U.S. 573, 579, 106 S.Ct. 2080, 2084, 90 L.Ed.2d 552 (1986), citing, Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970). The Supreme Court noted in Browny-Forman that "there is no clear line separating the category of state regulation that is virtually per se invalid under the Commerce Clause, and the category subject to the Pike v. Bruce Church approach. In either situation the critical consideration is the overall effect of the statute on both local and interstate activity." Brown-Forman, 476 U.S. at 579, 106 S.Ct. 2080.

In Granholm, supra., the Supreme Court noted that it had "previously recognized that the three-tier system [for alcoholic beverage distribution] itself is `unquestionably legitimate.' [citation omitted]." The Court stated that state policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent. "The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of alcoholic beverages and how to structure the liquor distribution system," noting that a state could bar importation of alcohol by banning its sale and consumption, or could assume direct control of alcoholic beverage distribution through state-run outlets or funneling sales through the three-tier system. Granholm, 544 U.S. at 488-89, 125 S.Ct. 1885, quoting, California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97, 110, 100 S.Ct 937, 946, 63 L.Ed.2d 233 (1980). However, the Court reiterated that the central purpose of the Twenty-first Amendment "was not to empower States to favor local liquor industries by erecting barriers to competition." Granholm, 544 U.S. at 487, 489, 125 S.Ct. 1885, quoting, Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200 (1984). In sum, as stated in Bacchus, 468 U.S. at 275, 104 S.Ct. 3049,

... [b]oth the Twenty-first Amendment and the Commerce Clause are parts of the same Constitution [and] each must be considered in light of the other and in the context of the issues and interests at stake in any concrete case. Hostetter v. Idlewild Bon Voyage Liquor Corp., [377 U.S. 324], at 332, [84 S.Ct. 1293], at 1298, 12 L.Ed.2d 350 (1964).

SB 82

SB 82 amended the statutory scheme relating to Kentucky wineries in a number of significant respects. We need not restate the provisions of the current law in order to discuss SB 82's revisions. Rather, we will describe the new scheme as it is slated to come into existence on January 1, 2007.

KRS 243.155(1) provides that any instate or out-of-state small farm winery may apply for a small farm winery license. A "small farm winery" is defined as a winery producing wines in an amount not to exceed fifty thousand (50,000) gallons in a calendar year. KRS 241.010(44). Among other privileges granted to a small farm winery licensee, it may ship to a customer wine produced by a small farm winery if (1) the wine is purchased by the customer in person at the small farm winery, (2) the wine is shipped by licensed common carrier, and (3) the amount of wine shipped is limited to no more than two (2) cases per customer per visit. KRS 243.155(2)(g).

KRS 244.165 which criminalizes the shipment of alcohol by out-of-state sellers to any Kentucky resident who does not hold a valid wholesaler or distributor license now exempts small farm wineries located in other states from its prohibition upon certain conditions. Out-of-state small farm wineries are permitted to ship wine to customers in Kentucky if the wine is purchased by the customer in person at the winery, it is shipped by licensed common carrier, and the amount of wine shipped is limited to no more than two (2) cases per customer per visit. KRS 244.165(2). Thus the explicit exemption under KRS 244.165, mirroring the requirements of the licensing provision, makes clear that the shipping privilege granted to licensed small farm wineries applies to out-of-state as well as in-state small farm wineries.

A new small farm winery wholesaler's license is created, at a cost to the applicant of $100.00 per annum. KRS 243.030(43). KRS 243.110 provides that, with certain exceptions not applicable to small farm wineries, each kind of license listed in KRS 243.030 is incompatible with every other kind so listed, and that no person or entity holding one kind may apply for or hold a license of another kind under that section. KRS 243.030(4) further provides that a person or entity cannot evade the prohibition against holding two kinds of licenses by applying for a second license through or under the name of a different person or entity. Application for a license will be denied if the applicant is substantially interested in a person or entity that holds an incompatible license. As the small farm winery license and small farm winery wholesalers license are both contained in KRS 243.030, licensed small farm wineries cannot also be licensed as small farm winery wholesalers. A small farm winery wholesaler's license permits the licensee to purchase, receive, store or possess wine produced by small farm winery licensees.

SB 82 also creates a Kentucky small farm wineries support fund. KRS 260.175. $400,000 per year will to be placed in the fund and allocated for designated purposes. $200,000 is earmarked for the promotion, advertising, and marketing in Kentucky of wine produced by small farm wineries located in Kentucky. $100,000 is for the establishment of a local marketing cost-share program to provide Kentucky small farm wineries with access to matching funds reimbursements for projects that promote and market their products. $75,000 is designated for the payment of fees to licensed wholesalers who apply to the Kentucky Grape and Wine Council to participate in its wine distribution program. A licensed wholesaler may apply and be considered for the program whereby the wholesaler agrees to distribute wines produced by small farm wineries licensed under KRS 243.155 and to sell them to retailers for the same price paid by the wholesaler. $25,000 is also allocated for administrative costs of the Kentucky Grape and Wine Council.

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